by Tom Taulli | September 20, 2012 7:30 am
Energizer Holdings (NYSE:ENR) started the week strong with a 10% jump to just over $75 in yesterday’s trading. The reason? Well, the company announced a plan to slash annualized costs $175 million to $200 million.
Nevertheless, shares of Energizer are still roughly unchanged for the year. In fact, the annual average return is a terrible 7% in the red for the past three years.
So is the company’s latest move something that will generate sustainable gains for shareholders? To see, let’s take a look at the pros and cons:
Strong Platform. Founded in 1905, Energizer quickly became a dominant player in battery business. Almost a century later, though, the company began a string of acquisitions. In 2003, it bought shaving and personal care products like Schick and Wilkinson Sword. And a few years later, it acquired Playtex, Edge, Skintimate and American Safety Razor/Personna. Energizer’s plan was ambitious and has indeed diversified the once-niche player.
Cost Cutting. Again, this is a big priority for the company and should undoubtedly result in a big jump in profitability — at least for the next year or so. The plan calls for rationalizing manufacturing facilities, reducing the workforce and getting savings from procurement. Energizer also will change its compensation structure for executives so it will be based on a blend of metrics based on EBITDA, return on invested capital and working capital performance.
Financials. Quite simply, they are in good shape, with operating cash flows of $347 million for the first nine months of 2012. There is also a decent dividend yield of 2.4%
Macroeconomy. The global sluggishness has been taking a toll on Energizer. And actually, it looks like the problems are also spreading into Asian markets. As a result, customers are focusing more on lower cost items, such as private-label products.
Competition. Energizer must contend with huge competitors on various fronts. In the battery business, rivals include biggies like Procter & Gamble’s (NYSE:PG) Duracell and Spectrum Brands. The other business lines, such as the shave skin-care segments, involve competitors like Bic, Kimberly-Clark (NYSE:KMB), Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ).
Mega-Retailers. Energizer must fight hard to get shelf space, but this is getting tougher as mega-retailers have been flexing their negotiating leverage. This is a red flag as close to 20% of Energizer’s sales come from Wal-Mart (NYSE:WMT), while the strong growth in dollar stores, like Dollar General (NYSE:DG) and Family Dollar Stores (NYSE:FDO), also adds more competition.
Energizer certainly has a set of strong brands, but still has to deal with several major headwinds, like huge competitors and a slowing world economy.
And even though the company is now focused on aggressive cost cutting, even that has its risks. It could actually harm Energizer’s ability to compete, for one. And all in all, the move seems more of a short-term approach to juice returns for shareholders.
After all, the company’s revenue growth has been grim. In the last quarter, there was a drop of 8.9%.
So in light of all this, the cons outweigh the pros on the stock.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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